Can my company transfer its life insurance policy to me before I sell?

If you are wondering whether the company can hand a life insurance policy to you personally before the business is sold, two of the Income Tax Act provisions that can matter when a policy leaves a corporation are sections 148(7) and 15(1). Each has conditions and exceptions, and a rule stated without them is wrong, so this page states them or names where they are. It describes how the provisions work; it does not say whether a transfer is a good idea.

Section 148(7): deemed proceeds

Section 148(7) applies if a policyholder’s interest in a life insurance policy is disposed of, other than under paragraph 148(2)(b), by way of a gift, by distribution from a corporation or by operation of law only to any person, or in any manner whatever to a person with whom the policyholder was not dealing at arm’s length. The policyholder is deemed to become entitled to receive proceeds equal to the greatest of the value of the interest at that time and, for dispositions after March 21, 2016, the fair market value of the consideration, if any, given for the interest and the policyholder’s adjusted cost basis of the interest immediately before the disposition. Subsections 148(8), (8.1) and (8.2) apply despite 148(7) to certain transfers to a child, or to a spouse, common-law partner or former spouse or common-law partner.

The cost to the person who receives it

Under section 148(7)(b), the person who acquires the interest because of the disposition is deemed to acquire it, at the disposition time, at a cost equal to the amount deemed to be the proceeds. Paragraphs 148(7)(c) to (e) also adjust a corporation’s paid-up capital, contributions of capital and contributed surplus in connection with the disposition, and paragraph (f) sets rules for dispositions before March 22, 2016. Section 148(9) defines cash surrender value as computed without regard to policy loans, policy dividends payable (other than paid-up additions) or interest on those dividends.

Section 15(1): a benefit to a shareholder

If a corporation confers a benefit on a shareholder, on a member of a partnership that is a shareholder, or on a contemplated shareholder, section 15(1) includes its amount or value in that person’s income for the taxation year that includes that time, except to the extent section 84 deems it a dividend or it is conferred in one of the ways paragraphs 15(1)(a) to (d) list, such as, for a corporation resident in Canada, by the redemption, acquisition or cancellation of its shares or on the winding-up, discontinuance or reorganization of its business. Whether moving a policy is a benefit, and which exception might apply, is for your accountant.

What to do next

Ask your accountant what each provision would mean for your policy, and ask your lawyer how the sale agreement should treat it. See also what happens to company-owned life insurance when you sell.